Category: Equitablog

As I see it, Federal Reserve policy right now is reasonable only if the unemployment rate is taken as a sufficient statistic for the state of the labor market. And it seems to me the odds are 4-1 against that being true…

…and that the employment, inflation, and futuer breakeven outcomes realized in that counterfactual world had been those seen in our world:

Is there any question that in that counterfactual world the FOMC would right now be actively and aggressively on the point of a massive QE program–that the only questions would be “how much” and “how quickly”?

Today, with the ending of QE, we live in that counterfactual world–with three differences:

1. Since the start of 2010 the FOMC has already done $2.2 trillion of QE–and has thus taken duration risk of a magnitude that the private market requires $2 billion a month to bear off of private-sector balance sheets.

2. As a result, whatever risks are involved in QE start from a baseline in which the private market is bearing $2 billion/month less in the amount of government and GSE duration risk than in the counterfactual world (modulus the Summers point that maturity extension has neutralized 1/3 of QE undertaken). And just what are those risks? And just how are they increased at the margin by starting with $2 billion/month less of government-issued duration risk in private-sector hands?

3. As a result, whatever benefits are expected from QE have been modified by what we have learned over the past 4.75 years about the benefits of QE. And just what have we learned?

Question: How do those three differences move us from being on the point of undertaking a massive QE program to it being off the table?

Question: And why is the option of regime change–price-level targeting with at least partial catchup to the pre-2008 expected price level trend–off the table as well?

Emmanuel Saez and Laura Tyson: Income Inequality in the Twenty-First Century:

Over at Project Syndicate: Over at Project Syndicate:

The story goes: since 1979, the peak of the last business cycle before the inauguration of Ronald Reagan, economic growth in America has been overwhelmingly a rich-only phenomenon. America’s poor and the middle class, it is often said, have at best only trivially higher inflation-adjusted real wages, incomes, and living standards send their predecessors who occupy the same slots in the income distribution back in 1979. While real GDP per capita in America has grown from $29 thousand per year to $50 thousand per year in 2009-value prices–total growth of 72%, or 1.6% per year–all or almost all of this growth has gone to those who now occupy the rich slots in the American income distribution.

How true is this, really? The answer appears to be: true–with perhaps a very few caveats, but important caveats:

One important caveat is found in the Congressional Budget Office’s Distribution of Household Income and Federal Taxes:

[American] real after-tax income for the lowest quintile [was] 49 percent higher in 2010 than in 1979 (see Figure 9). Income growth averaged 1.3% annually for that group over the period. After-tax income for the middle three quintiles in 2010 was 40 percent higher than in 1979—equivalent to an average annual growth rate of 1.1% for the period. Households in the 81st to 99th percentiles… [saw] after-tax income… 64 percent above its level in 1979…. In 2010, household income for the top 1% was 201 percent above the mark for 1979, representing an average annual growth rate of 3.6%, far ahead of any other income group…

And, by now, with the recovery concentrated among the rich as well, the top 1% of Americans are highly likely to be back to a cumulative 300% gain since 1979.

But real income gains of 1.3% per year for those bottom-quintile slots in the American income distribution are not chopped liver, are they? The gap with the 1.6% per year real American GDP per capita growth rate is small, isn’t it?

Well, yes and no.

You can say that market income has become grossly more unequal since 1979 with the slots in the bottom half of the income distribution losing absolute ground in real income, and with taxation becoming less progressive, but that while this increase inequality has not been fully offset it has been substantially moderated by the growth of the social insurance state.

But when you look at the 1.3% per year growth rate of after-tax real income that the CBO calculates for the bottom quintile, 0.9%-points per year of that comes from the growth of the health-care financing programs: Medicare, Medicaid, SCHIP. CBO counts all of that growth as an increase in the after-tax real incomes of America’s poor. But that is not money that America’s poor can spend, so some haircut should be applied. Moreover, only half of those expenditures show up as more health care received by program beneficiaries–the other half flow into the general American health-care financing system and cover care that was previously uncompensated. And America’s health care financing system is uniquely inefficient: it really does look like other OECD countries get more bang in terms of health and healthcare services from $1 of spending then America gets $2. Apply all of those haircuts, and it seems to me that a better estimate of the contribution of expanded American public health-care programs to the material well-being of the American poor is not 0.9%-points per year but 0.2%-points per year.

Hence the necessity of something like RomneyCare, or ObamaCare, or biting the single-payer bullet, so that America gets something like normal OECD value out of its enormous health-care expenditures.

Depending on whether the day is odd or even, I come down in two different places on this issue of the interaction of growing government health-care financing programs and inequality. On odd days, my bottom line is that material well-being since 1979 has grown at 0.5% per year for America’s poor compared to 4.0% per year for America’s rich (and 6.0% per year for America’s super-rich) because most of the expansion is not the equivalent a greater income for America’s poor in any reasonable sense, and because America’s broken health-care financing system seems that America gets relatively little health well-being bang out of it’s typical health care financing buck. On odd days, my bottom line is that healthcare for and the health of America’s poor in 1979 lagged so far behind that achieved in a normal OECD social democracy that even though each extra $1 produced only $0.25 of real health-care services delivered, poor health status meant that that $0.25 was Worth about one dollar to the poor in terms of material well-being. On this reading, the expansion of the health-care programs has kept the properly-measured material well-being of America’s poor improving since 1979 at a rate not too much less then that of real GDP per capita. But that the healthcare coverage and financing gaps that existed in America in 1979 made it then a much more unequal place then the income dollar-share numbers then showed.

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Must- and Shall-Reads:

• Austin Frakt: Management
• Gavyn Davies: Is Economic Growth Permanently Lower?
• Jon Faust: An End to QE
• Mark Thoma: Are Economists Ready for Income Redistribution?

1. Fast FT: Lars Svensson: 1, Sadomonetarists: 0: “Lars Svensson quit Sweden’s Riksbank in a huff last year, frustrated by the central bank’s insistence on raising rates despite the deflationary dangers. His former employer has just tacitly admitted that the economist was right. The Riksbank earlier this morning cut its benchmark interest rate to an unprecedented zero per cent, and markedly moved out its forecast for when it will lift rates again until mid-2016, in an attempt to ease the deflationary forces gripping the Swedish economy. The Riksbank should arguably have listened more closely to its former deputy governor sooner…”

2. Richard Mayhew: Getting Dropped Hurts: “Back in 2008, there was an excellent study on the cost of losing health insurance and then regaining it for people with chronic conditions…. $240 per member per month for Medicaid members in the mid-2000s is a massive number…. I am speculating that a decent chunk of the cost growth slowdown and differential for Expansion states compared to non-Expansion states is a more streamlined set of care…. In 2013, a person who made a few dollars too many, or had been on a program for a month too long would be dropped from Legacy Medicaid, and previously manageable conditions could become unmanaged. In 2014 in expansion states, that person would be dropped from Legacy Medicaid and instantly re-enrolled into Federally funded Expansion Medicaid. The only difference they would see in most expansion states was a different ID card in the mail three weeks later…”

3. David Hendry: Climate change: Lessons for Our Future from the Distant Past: “Climate change has been the main driver of mass extinctions over the last 500 million years… provides a stark warning. Human activity is producing greenhouse gases, and as a consequence global temperatures and ocean heat content are rising. Such trends raise the risk of tipping points. Economic analysis offers a number of ideas, but a key problem is that distributions of climate variables can shift, invalidating stationarity-based analyses, and making action to avoid possible future shifts especially urgent…”

4. Ed Luce: Obamacare’s drip-fed success: “President Barack Obama’s… Obamacare is rapidly settling into America’s landscape. In politics, its virulence is receding: Republicans are far more muted in their attacks than anyone expected a few months ago…. Obamacare is messy and ugly. But it is starting to cover the map…. Republicans in the Senate… are adopting what can politely be called a pretzel stance–promising to keep those parts that voters like while vowing to kill the law ‘root and branch’, in the words of Mitch McConnell, Senate Republican leader. Mr McConnell has pledged that Kentucky, where he is battling to save his seat, will keep its healthcare exchange, ‘Kynect’, even after Obamacare is abolished…. John Kasich, the Republican governor of Ohio, is equally contorted…. After an outcry on talk radio, he ‘clarified’ that he would fight for the law’s full repeal but his state would still keep its Medicaid benefits, which has brought 330,000 Ohioans in from the cold…. There are roughly 10m fewer uninsured Americans than there were a year ago. That number will only grow…”

5. Henry Farrell: Big Brother’s Liberal Friends: “Sean Wilentz, George Packer and Michael Kinsley are a dismal advertisement for the current state of mainstream liberal thought in America. They have systematically misrepresented and misunderstood Edward Snowden and the NSA.”

Should Be Aware of:

• Paul Murphy: Still waiting for the Great Rotation? Stop
• Pragmatic Capitalism: Thinking About Bond Bubbles…
• Katha Pollitt: Wonder Woman’s Kinky Feminist Roots

1. Dan McCrum: ERP Derp: “McCrum smackdown watch…. FT Short View…. ‘Over time, the average equity risk premium has been 3.5 per cent, and Goldman Sachs uses that figure to estimate the long term rate of earnings growth embedded in stock prices… the implied rate of real growth for earnings [on European equities]… is now negative…. “Since long-term growth and inflation expectations seem to have fallen in the bond markets, it would be logical that they have fallen in the equity markets too. But… it is hard to disaggregate the relative shifts between growth expectations and the risk premium…. Assuming a fixed 3.5% ERP… the implied real rate of growth… [is] around -4%… clearly pricing in some form of long-run stagnation…. But even if we assume the ERP does not revert to long-run averages of around 3.5% but converges to a long-run average of, say 5%, the market is still implying 0% pa earnings growth over the next 20 years….”‘ This sort of analysis is probably more of a starting point for an interesting conversation about the market, than fill your boots with stock conclusion. Which we mention as using the Equity Risk Premium for any sort of analysis is not without haters. Here, for one, is the Economist: ‘Equity risk premium and term premium sound like sophisticated economic concepts, but in reality they are statistical junk yards into which economists toss stuff they can’t explain with fundamentals… all the murky, unquantifiable factors traders study….’ Then there is also this FT blog from Andrew Smithers, scourge of stockbroker economics: ‘In some of my more gamesome moments I have challenged students to produce an article about the ERP which made a useful contribution to our understanding of the way financial markets work. So far the challenge has not been met…”

2. Guy Michaels and Ferdinand Rauch: Resetting the Urban Network: 117-2012: “Do locational fundamentals such as coastlines and rivers determine town locations, or can historical events trap towns in unfavorable locations for centuries? We examine the effects on town locations of the collapse of the Western Roman Empire, which temporarily ended urbanization in Britain, but not in France. As urbanization recovered, medieval towns were more often found in Roman-era town locations in France than in Britain, and this difference persists today. The re-setting of Britain’s urban network gave it better access to natural navigable waterways when this was important, while many French towns remained without such access. We show that towns without coastal access grew more slowly in both Britain and France from 1200-1800, and calculate that with better coastal access, France’s urban network would have been up to 20-30 percent larger in 1800.”

3. The Growth Economics Blog: The Loss of Skill in the Industrial Revolution: “A recent working paper by Alexandra de Pleijt and Jacob Weisdorf… looks at skill composition of the English workforce from 1550 through 1850…. The big upshot to their paper is that there was substantial de-skilling over this period, driven mainly by a shift in the composition of manual laborers. In 1550, only about 25% of all manual laborers are unskilled (think ditch-diggers), while 75% are either low- or medium-skilled (weavers or tailors)… [But] manual laborers [rise], reaching 45% by 1850, while the low- and medium-skilled fall to 55%…. This shift really starts to take place by 1650, while before the traditional start of the Industrial Revolution…. ‘High-quality workmen’–carpenters, joiners, wrights, turners–rose only from 3.9% to 4.9% of the workforce between 1550 and 1850. These are precisely the kinds of workers that Joel Mokyr claims are the crux of the Industrial Revolution in England. They built, improved, adapted, and micro-innovated all the classic inventions…. It’s a really interesting paper, and it’s neat to see how much information you can keep sucking out of these parish records from England…. Does industrialization depend on a concentrated core of skills, rather than a broad distribution of skills? That is, if Mokyr is right about the source of English industrialization, then it’s those extra 650K high-skilled workers that really made all the difference…. Second, should we care about de-skilling?… Could this just mean that the economy was getting more efficient at using the human capital at hand? England didn’t need to waste all that time and effort skilling-up a big mass of workers. They could be used immediately, without much training…. Doesn’t that imply that England was getting more (output) from less (human capital)? That’s a good thing, right?…

4. Jay Rosen: Facebook’s phony claim that “you’re in charge”: “In today’s New York Times… Ravi Somaiya visits with Facebook…a writes: ‘Mr. Marra said he did not think too much about his impact on journalism: “We try to explicitly view ourselves as not editors… don’t want to have editorial judgment over the content…. You’ve made your friends… connected to the pages that you want to connect to… are the best decider…. We’re saying, ‘We think that of all the stuff you’ve connected yourself to, this is the stuff you’d be most interested in reading.’”‘… I say a lie, not just an untruth, because anyone who works day-to-day on the code for News Feed knows how much judgment goes into it…. I’m not sure why it’s sitting there unchallenged in a New York Times story. For that doesn’t even rise to the level of ‘he said, she said.’ It’s just: he said, poof!… A more plausible description would go something like this: ‘The algorithm isn’t picking stories the way a home page or front page editor would…. Instead, it’s… recommending stories based on Facebook’s overriding decision rule… maximizing time on site…. The end-in-view is… a user base in constant contact with Facebook. As programmers we have to use our judgment–and a rigorous testing regime–to make that happen. We think it results in a satisfying experience.’ That would be a more truthful way of putting it…. Here is where journalists have to do their job better. It’s not just calling out BS statements…. It’s recognizing that Facebook has chosen to go with ‘thin’ legitimacy as its operating style, in contrast with ‘thicker’ forms…”

5. Matt O’Brien: The worst possible case for the worst possible idea, the gold standard – The Washington Post: “Thiel might think that gold is the only ‘real’ money, and everything else is just a representation of it. That’s what Krugman calls the ‘Midas delusion’: the belief that the one true measure of money isn’t how many goods and services it can buy, but rather how much gold. This is just as nutty as it sounds. It’s saying that the only way to measure our standard of living is by the price of gold, but the price of the things we need to actually, you know, live. The dustbin of history is there for a reason.”

David Leonhardt’s Upshot is doing some very nice data-visualization work:

Kevin Quealy and Margot Sanger-Katz: Obamacare: Who Was Helped Most?:

Key takeaways:

1. Having a state government that expands Medicaid is, of course, overwhelmingly the most important factor: look at Kentucky-WV vs. Tennessee-Virginia, or Arkansas-Missouri.

2. A state government that tries to hide the existence of the exchange-marketplaces from people can (largely) do so, and can cause a huge amount of damage in implementation: look at Wisconsin, Kansas, or Montana.

3. Even in states that did not expand Medicaid and where the state government did not lift a finger to inform people of the exchange-marketplaces, Hispanics have been signing up for insurance in numbers significantly greater than I had expected–look at the Texas-Mexico border.

4. With respect to what remains to be one, look at the Confederacy! (Minus Medicaid-Advantage Arkansas, of course.) At the end of the nineteenth century the Confederacy was taxed to provide pensions for the widows and orphans of Union-Army Civil-War veterans: now we have a similar pattern underway–although this time it is voluntary, produced not by northern Unionist-Republican votes but by southern neo-Confederate-Repubublican votes.

5. Given how broadly the money from Obamacare flowed not just to the poor and previously-uninsured but to all the different parts of the medical-industrial-financial complex, I am still amazed by how not ideology–ObamaCare, remember, is in its essentials a Cato Institute production–but mere partisanship (and anti-Obama racism?) trumps the material interest of the money flows. Given the centrality of the medical-industrial-financial complex to so much of so many local economies, this extremely sharp regional cutting-off-one’s-nose is an extraordinary shock.

6. What SL said about NFIP vs. Sibelius: Scott Lemieux: A Disgrace Even By Roberts Court Standards: “The effects of John Roberts re-writing the ACA’s Medicaid expansion are felt in Mississippi…. ‘”We work hard at being last”, said Roy Mitchell, the beleaguered executive director of the Mississippi Health Advocacy Program, when we met in Jackson. “Even a dog knows the difference between being tripped over and being kicked”‘. This reflects an infliction of pain and suffering and death than was eminently avoidable. If you’ll forgive me for reiterating, it’s nearly impossible to overstate how terrible this decision was. It would be one thing if this denial of access of medical care to millions of people was enforcing some explicit constitutional provision, but it wasn’t. If this judicially invented at least protected some meaningful individual liberty interest it might be a little more understandable, but it doesn’t. At best, the lives of millions of people have been made worse–with consequences up to and including death–in order to prioritize inferential states’ ‘rights’ [to ‘equal dignity’] over human rights. But here’s the kicker: Sebelius does not even provide any significant protection for state autonomy. Congress remains free to create a Medicaid program that requires everyone up to 138% of the federal poverty line to be covered and makes all Medicaid funding contingent on meeting these conditions. It simply would have to structure it by formally repealing the previous Medicaid and replacing it… thus evading the Supreme Court’s newly minted requirement that existing funding can sometimes be made contingent on accepting new conditions and sometimes can’t and we’ll let you know ex post facto…. The fact that so much misery was created for so little should permanently shame the justices who voted for it. It’s judicial review at its least defensible.”